Unbounded RSI

The Unbounded RSI indicator provides a unique take on momentum by removing the traditional 0-100 normalization found in the standard Relative Strength Index, allowing for an unrestricted view of the relationship between average gains and losses. This tool aims to help traders identify momentum shifts and trend strength without the constraints of overbought or oversold boundaries.

Usage

The Usage section focuses on interpreting the momentum oscillator and its signal line. Unlike the classic RSI, this version utilizes the raw difference between smoothed average gains and average losses.

• Trend Identification: When the main line (Diff of Gains) is above the zero level and colored green, it indicates that average gains are outpacing average losses, signaling positive momentum. Conversely, a red line below zero indicates bearish momentum.
• Momentum Strength: The distance from the zero line represents the strength of the move. Increasing heights in the oscillator suggest widening gaps between gains and losses, showing accelerating momentum.
• Exits and Reversals: A decrease in the oscillator's height while still above zero suggests fading bullish momentum. Crossovers between the main line and the blue signal line can be used to identify potential entry or exit points.

Details

This script departs from the traditional RSI formula, which typically indexes price changes into a bounded range. Instead, it calculates the Exponential Moving Average (EMA) of gains and losses separately. It then applies a Simple Moving Average (SMA) to these values and subtracts the smoothed average loss from the smoothed average gain. This "Unbounded" approach removes common RSI limitations such as range shifts and fixed 70/30 or 60/40 levels, focusing purely on the raw velocity of price changes.

Settings

• Period: Sets the lookback window used to calculate the average gains and losses. A higher period results in a smoother but slower responding indicator.

FAQ

How do I use the Unbounded RSI for entries?

Entries are typically sought when the indicator crosses above the zero line or when the "Diff of Gains" line crosses above the signal line during a period of price consolidation or breakout.

Is this indicator better than the standard RSI?

It is not necessarily better, but it offers a different perspective. It is designed for traders who find fixed overbought/oversold levels restrictive and prefer to view momentum as an expanding or contracting gap between price gains and losses.

How can I access Unbounded RSI?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.